Many small businesses are still taking advantage of the Employee Retention Tax Credit (ERTC), which was created as part of the CARES Act to provide tax relief for companies that were negatively impacted during 2020 and 2021 due to COVID-19. Though the eligibility period has ended for ERTC, businesses can (and should) still retroactively claim this credit.
However, when the Inflation Reduction Act was passed in August, the IRS received billions of dollars for Enforcement and Operations Support and, as a result, has been taking a close look at tax filings for discrepancies and fraud, specifically related to COVID programs like the ERTC.
In addition, and adding concern to the situation, is the fact that there has been a huge increase in tax credit service startups offering to help companies claim the ERTC. On October 19, 2022, the IRS warned taxpayers to be wary of direct solicitations by these third-party tax credit service providers because they have reason to believe that some are advising taxpayers to claim benefits when they may not qualify. In this warning, the IRS also noted that taxpayers are responsible for the information reported on their tax returns and that penalties and interest will be applicable for inappropriate claims under this program.
The fact that the IRS is focused on this subject is not surprising, and several factors drive it:
- Significant Economics – the program is lucrative for qualified employers. In many cases, the economics are as much or more than those involved in employers’ PPP claims;
- Lack of Oversight – the program was established as voluntary compliance tax law;
- New Participants – because most qualified employers are under 500 full-time employees, this is the first time they’ve ever taken a tax credit. And because tax credits have historically been claimed mostly by large employers with expensive and sophisticated advice, these new participants are frequently at a loss for where to find experienced guidance.
- Significant Participation – The IRS expects the number of ERTC claimants to be significant and the dollars claimed to measure in the billions.
In light of this, it is critical that all small businesses carefully assess the capabilities of the tax credit service provider they choose to ensure that they are properly documenting their eligibility under the program and avoiding the risk of problematic future audits and the penalties and interest that could arise as a result. Worst-case scenario? Your company is required to repay the ERTC tax credit along with penalties and interest due to improper ERTC claims.
So what can you do to ensure this doesn’t happen? To best position your business to successfully answer a future challenge by the IRS, you must properly document your claim.
Here are three steps to help your company properly assess and claim the ERTC:
Step One: When hiring an expert, look for specific qualifications
A truly qualified tax credit provider should be familiar with the levels of surety applicable in issuing written advice (levels of assurance can include will, should, more likely than not, substantial authority, realistic possibility of success, and a reasonable basis to conclude). A qualified provider should also have professionals that have issued written tax advice in situations unrelated to COVID relief. Due to the fact that the majority of qualified employers are under 500 full-time employees, this is quite likely the first time they’ve ever claimed a tax credit. And because claiming a tax credit is new for many taxpayers, they often don’t have a clear understanding of documentation requirements and the risks that go along with inadequate documentation.
Step Two: Get it in writing
Unlike the PPP, which was overseen by the Small Business Administration and required an application, review, and approval process, no governmental agency will review individual business qualifications and indicate that a business qualifies before issuing funds for ERTC. In addition, qualifications for the ERTC are not always straightforward. They can be somewhat subjective, so be sure that the provider you choose to determine your company’s eligibility provides it in writing.
Step Three: Get it Insured
The qualified provider you choose should be able to demonstrate that their work is covered by professional liability insurance to provide coverage should there be an issue with their advice. Also, if your provider wasn’t around before COVID, this could signify a red flag. Make sure your provider will still exist five years from now when a potential audit requires a defense of your claim.
Deadline for Claiming ERTC
For 2020, the ERTC was worth up to $5,000 per employee per year, and in 2021, it was worth up to $7,000 per employee per quarter. The statute of limitations for claiming it will start to run out on April 15th, 2024, so if you haven’t assessed your eligibility for the program, you should do so now.
Being audited by the IRS can be a stressful and expensive experience, but filing a correctly handled ERTC claim doesn’t have to be if you follow the three steps listed above.
Brent Johnson is the Co-Founder of Clarus Solutions (soon to be Arvo) located in Columbus, Ohio. Brent earned his Accounting degree from The Ohio State University and Master of Taxation from Capital University Law School. Brent believes in the power of tax credits for improving business financials and built the Clarus cloud-based platform to help more businesses unlock the full value of federal and state incentive programs.